Executive Summary
Car insurance is a cover against losses related to the use of automobiles. These covers vary depending on the needs of the consumers. Car insurance comprises of liability insurance, impact insurance, uninsured/under-insured motorist coverage, and comprehensive insurance among others. The main objective of car insurance is to protect the car owner and the family from financial losses in the event of an accident or any other eventuality. The report is going to explore car insurance in the Kingdom of Saudi Arabia and the U.S. Consequently, comparative analysis of car insurance policies between the two countries is conducted.
Introduction
Car insurance is a cover against losses associated with the use of automobiles. The coverage varies depending on the needs of the consumers. Car insurance comprises of liability insurance, impact insurance, uninsured/under-insured motorist coverage, and comprehensive insurance among others (Goodwin 5). Liability insurance is regarded as the minimum and mandatory insurance cover for all the motorists. Liability insurance protects the car owner from losses in the event of an accident or any other eventuality that requires third party compensation. Collision insurance provides more protection than liability insurance. Collision insurance also covers the car when the owner is responsible for the damage (Sage 1).
Uninsured/under-insured motorist coverage covers the car owner who is involved in the accident but is not insured or partially insured. Lastly, comprehensive insurance covers other damages to the car that are unrelated to accident, for instance, theft, vandalism, natural disasters and fire among others (Goodwin 5). Most insurance companies do provide discounted insurance for individuals who adhere to safety precautions, for example, non-smokers. In addition, car insurance requirements varies from one country to another. For that reason, it is important for individuals to be on familiar terms with the minimum car insurance requirements in their host countries (Awais 1).
To cut a long story short, car insurance protects the car owner and the family from financial losses in case of any eventuality. Car insurance is not only a necessity but also a legal requirement for almost all the car owners across the globe. In other words, individuals who have not insured their car are liable to heavy fines or even jail term (Sage 2).
Report Purpose
The report aims at exploring car insurance in the Kingdom of Saudi Arabia and the US. The report will then compare and contrast car insurance policies between the two countries.
Car Insurance in the Kingdom of Saudi Arabia
Car insurance is compulsory in the Kingdom of Saudi Arabia. This type of insurance comes in two fundamental forms namely: third party insurance and comprehensive insurance. Any individual who owns a car in Saudi Arabia must comply with at least one of the policy. Third party mandatory insurance takes care of the physical injury or damages caused to other individuals involved in the accident. However, this policy does not take care of the owner of the car or the car itself. Third party mandatory insurance was recently replaced by unified compulsory car insurance policy (Awais 1; SAMA 2).
Comprehensive insurance as already been mentioned covers other damages to the car that are not related to the accident. Similar to third party insurance the prices charged for comprehensive insurance varies from one company to another. Therefore, individuals seeking for car insurance services should always ask for referrals from friends and family. In addition, comprehensive insurance can only be bought once in every ten years. This means that individuals who fail to insure their car at the time of purchase can only go for third party mandatory insurance (Awais 1).
Takaful Concept
The insurance policies in Saudi Arabia similar to other Arab States are based on the Islamic law. Auto insurance/car insurance also follows an Islamic insurance instrument principally known as Takaful (Swartz and Coetzer 335). Takaful provides risk protection and savings for its users mainly muslims. However, it is not limited to Muslims alone. Unlike the usual insurance that involves risk elements, gaming and interest, Takaful offers a more reliable protection. This concept originated from Mecca a couple of centuries ago where a community would come to the rescue of its members when faced with unforeseen financial liability (Swartz and Coetzer 336).
According to Takaful concept, people come together and contribute funds that are used to protect members from any form of financial loss or harm. Each member is guaranteed protection or financial help through a pool of funds generated by the entire group. In Saudi Arabia, Takaful is a legally binding agreement and requires all the members to contribute according to the agreement. This scheme is built around the concept of financial donation and the Islamic teachings (Divanna and Shreih 2).
According to Anwar, Takaful concept is “based on mutual cooperation where the insured is also the insurer” (3). The scheme basically exists to spread risks and to ease the financial losses that could face individuals. Other Arab countries that have developed this insurance scheme include Iran, Bahrain, Egypt, Qatar, Kuwait and UAE. Swartz and Coetzer state that the “contributions made under this scheme are converted into risk pool” (339).Funds from this pool are used to cushion members from any financial loss or damage. In case there is a surplus, the amount is shared among the members. On the other hand, shortages are catered for through additional contribution or investment funds. The main objective of the scheme is to protect members from any form of unexpected losses (Swartz and Coetzer 339).
Takaful operations in Saudi Arabia are overseen by an autonomous body known as the Shari’ah Monitoring Council. Besides auto insurance, Takaful has been used to insure property, valuables, health and life. It is also offered to a broad range of industries including construction, real estate, manufacturing, marine, health and many more (Divanna and Shreih 4). The modern Takaful scheme is almost the same as the conventional insurance practice in that contributions are computed and fixed for individuals at a specific age (Swartz and Coetzer 339).
The Unified Mandatory Car Insurance Policy
According to the Royal Decree dated 02/06/1424, the unified mandatory car insurance policy became effective after being approved by the governing council. This policy replaced the third party mandatory car insurance policy (SAMA 2). Under this policy the insurance company is obligated to compensate the third party in the event of a loss or damage to the property as stipulated in the policy. The insurance company is required by the law to compensate the third party for any physical or material damage within or without the car (SAMA 3).
However, article 4 of the policy sets out the coverage limits. According to this article, compensations for any form of loss both physically or materially should not exceed ten million Saudi Riyals. The company can not renounce liability for compensation to the third party because of the negligence or violations committed by the car owner (SAMA 5). The insurance company has the right of recovery from the insured in such scenario but has to compensate the third party.
Examples of cases in which the insurance company has a right of recovery from the insured include violation of the restrictions laid out in the schedule, overloading, over speeding, driving under the influence of drugs, under-age driving, driving in restricted areas, driving a stolen car, and driving using invalid licence. Other cases include false representation, deliberate accident, late notification, and violating other traffic rules (SAMA 6).
Nonetheless, there are cases that are not covered under this policy. They include liabilities arising from war, insurgency, strikes or labour disorder, radioactivity, and natural calamities among others (SAMA 7). Other liabilities not covered under this policy include loss or physical injury to the insured, damaged goods in transit and fines imposed by the authority for violating the law. The surplus of the insurance money after the compensation of the third party is given back to the insured (SAMA 8).
Car Insurance in the United States
Car insurance in the US is similar to the Saudi’s conventional insurance in many aspects. US car insurance just like many other countries is designed to cover car owners from financial liability or loss in the event of an accident (Sage 2). In some states it is mandatory for car owners to have at least minimum liability insurance. However, states like Virginia, New Hampshire and Mississippi do not require minimum liability insurance from the car owners. In these states the car owner can pay a fee or bond to the state for the use of uninsured motorcar. Additionally, article 4 of the US Insurance Law safeguards the rights of all the US nationals when travelling across different states (Goodwin 3).
The car owners in the states where minimum level of liability insurance is compulsory normally pays a monthly insurance premium. This can also be in the form of annual lump sum depending on the agreement between the insurer and the insured (Sage 3). The fee charged on insurance premium in US depends on a number of factors and these include the type of car covered, age and gender of the car owner, driving record of the car owner and the locality where the car is largely driven or kept. Insurance discounts are based on the above elements (Goodwin 4).
The US car owners are protected at different levels depending on the type of policy bought. In most US states the car owners are required to have at least a minimum liability insurance to cover the cost of damage or loss to the third party in case of an accident. However, in some states the rules are flexible as long as the car owner provides a proof of financial responsibility (Sage 3). Car insurance (which is also known as the automobile liability insurance) covers the car owner and other users provided that they do not share the same premise with the car owner and are included in the policy. Users living in the same premise with the car owner are required to be covered explicitly in the policy, especially those who have reached a driving age (Goodwin 5).
Car insurance policy does not protect the insured all the time, for instance, when the policyholder drives another individual’s car. However, the country also has a policy that specifically covers non-owners. Non-owner insurance policy ensures that people using cars that do not belong to them are also covered. The policy also covers historical traffic offenders whose licence have been reinstated. Non-owner coverage policy extends to rental cars and premium charges depending on the type of the car used. However, where the rental cars have already been insured non-owner coverage do not apply (Sage 3).
Liability coverage in the US varies from one jurisdiction to another and is only offered when the car owner is culpable for the loss or damage. Whatever the minimum liability insurance required within a given jurisdiction, the car owner can increase the coverage before an accident to cater for additional charges (Sage 3). For instance, in the event that the car owner hits an electricity pole and damages it, the minimum liability coverage only takes care of the damage. However, the car owner may also be liable to additional fines due to service interruption and this varies from state to state. Another example is when the liability coverage only pays for the injury caused to the third party, but the car owner has to bear the legal fees or other court charges (Sage 4).
In the US, an individual can also decide to combine both the property damage and physical injury coverage through a unified single limit insurance policy. The unified single limit policy takes care of the third party’s property (for example a car) and the injury sustained during the accident. However, the two policies can also be bought separately through a split liability insurance policy. In such case, property loss or destruction is covered under property damage coverage, while physical injury is covered under the injury liability insurance (Sage 5).
Bodily injury coverage is further divided into two namely: upper limit per individual and upper limit per accident. For instance, in the state of California the minimum limit per individual is currently fixed at $15000 and $5000 for a property. On the other end, the insurance company can only pay up to a maximum limit of $50000 for an individual hospital bill and $30000 for property damage. Any additional cost has to be incurred by the car owner (Goodwin 6).
Full insurance coverage applies in the US. The term full coverage is used to refer to an all-inclusive coverage which comprises of impact and comprehensive insurance. Impact coverage is a policy that takes care of the total or repairable damage during a collision. On the other hand, a comprehensive coverage takes care of losses or damages caused by other incidents unrelated to the accident (Goodwin 7). However, critics argue that the term full coverage is misinformed since there are other independent and optional coverage that are required by different states. For instance, in the state of Pennsylvania car owners are required to purchase liability coverage in addition to comprehensive and collision coverage (Goodwin 8).
Last but not least, the US car insurance also provides for uninsured or under-insured motorist coverage. This policy takes care of individuals who are not insured or partially insured. In the event of an accident the insurance company takes care of the bills and takes responsibility of the individual at fault. In other words, they take blame on behalf of the guilty party. For instance, during the peak of the global financial crisis most car owners in the state of Colorado (about 30%) had not purchased minimum liability insurance. In such case, they could do with uninsured or underinsured motorist coverage to protect them from any form of financial loss in the event of an accident (Sage 5).
Analysis
Despite of some disparities, the conventional car insurance policies between Saudi Arabia and US are almost the same. It is mandatory for car owners in Saudi Arabia to have minimum liability insurance same as in most American states. However, a number of American states offer flexible policies hence minimum liability insurance is not a must. In addition, the U.S. has more variety of car insurance policies or coverage than Saudi Arabia. In Saudi Arabia, car insurance is predominantly third party mandatory insurance and comprehensive coverage. The former was replaced by unified mandatory car insurance policy.
It is mandatory for every car owner to purchase at least one of the policies in Saudi Arabia. Failure to do so attracts a fine or a jail term. However, in US car insurance policies vary from one state to another. In most states it is mandatory to have at least a minimum liability insurance, while in some states all the car owner need to do is to pay a fee or bond to the state for the use of uninsured motorcar. On top, the US has other liability coverage besides the two fundamental policies found in Saudi Arabia. These include full coverage (which is a combination of comprehensive coverage and collision coverage), collision insurance, and uninsured/under-insured motorist coverage.
However, the most distinct aspect of car insurance between the two countries is the use of Takaful in Saudi Arabia. Takaful concept is based on Islamic principles and law. There are a number of disparities between Takaful and conventional insurance. First, in Takaful the insurer and the insured are more of the same. This concept is basically pooling funds together and sharing the liabilities of each member. Second, Takaful does not involve risk elements, gaming and interest which are against Islamic principles and law. Last but not least, funds pooled together cannot be invested in businesses that engage in speculation and interest.
Conclusion
The conventional car insurance policies between Saudi Arabia and the U.S. have very few disparities. They are all aimed at protecting the car owner from total financial loss in the event of an accident. In Saudi Arabia, car insurance is predominantly third party obligatory insurance and comprehensive coverage. The former was replaced by unified mandatory car insurance policy. However, in US car insurance policies vary from one state to another.
In most states it is mandatory to have at least a minimum liability insurance, while in some states it is not a must. In addition, the US has other liability coverage besides the two fundamental policies found in Saudi Arabia. Nonetheless, the most distinct aspect of insurance between the two countries is Takaful concept. Takaful concept is based on Islamic principles and law. Takaful is basically contributing funds to a common pool and sharing the liabilities of each member.
Works Cited
Anwar, Habiba. Islamic Finance: A Guide for International Business and Investment, London, UK: GMB Publishing Ltd, 2008. Print.
Awais, Yasmine. Car Insurance in Saudi Arabia. 2010. Web.
DiVanna, Joseph and Antoine Shreih. A New Financial Dawn: The Rise of Islamic Finance, United Kingdom: Leonardo and Francis Press Ltd, 2009. Print.
Goodwin, Wayne. Consumer Guide to Automobile Insurance, North Salisbury Street, North Carolina: North Carolina Department of Insurance, 2010. Print.
Sage, Robbie. Car Insurance Requirements: State by state minimum requirements. 2010. Web.
SAMA. The Unified Compulsory Motor Insurance Policy, Riyadh: Saudi Arabia Monetary Policy, 2007. Print.
Swartz, Nico and Pieter Coetzer. “Takaful: An Islamic Insurance Instrument”. Journal of Development and Agricultural Economics 2.10. (2010): 333-339. Print.